##### Table of Contents

---

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---

FORM 10-QSB



---

(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------

For the quarterly period ended March 31, 2006



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------

For the transition period from  to

Commission File Number 000-26175



---

China Evergreen Environmental
Corporation

(Exact name of small business issuer as specified in its charter)



---



|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Nevada                                                         |  | 88-0409151                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)

Suite 7A01, Baicheng Building

584 Yingbin Road

Dashi, Panyu District

Guangzhou, Guangdong, China

(Address
of principal executive offices)

86-20-3479 9768

(Issuers telephone number)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)



---

Check whether the issuer
(1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.): Yes ̈No  x

As of May 14, 2006, the Company had 135,903,698 shares of its common stock issued and outstanding.

Transitional Small Business Disclosure Format (Check one):    Yes ̈No  x



---



---

##### Table of Contents

PART 1 -
FINANCIAL INFORMATION



|                                                                                                         |  |        
|-------------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                         |  | Page(s)
|Item 1. Financial Statements                                                                             |  |        
|                                                                                                         | 
|Unaudited Consolidated Balance Sheetsat March 31, 2006 and December 31, 2005                             |  | 1      
|Unaudited Consolidated Statements of Operations for thethree-month periods ended March 31, 2006 and 2005 |  | 2      
|Unaudited Consolidated Statements of Stockholders Equity                                                |  | 3      
|Unaudited Consolidated Statements of Cash Flow for thethree-month periods ended March 31, 2006 and 2005  |  | 4      
|Notes to Unaudited Consolidated Financial Statements                                                     |  | 5      
|Item 2. Managements Discussion and Analysis or Plan of Operations                                       |  | 11     
|Item 3. Controls and Procedures                                                                          |  | 17     

PART II -
OTHER INFORMATION





|                                                             |  |   
|------------------------------------------------------------ |  | --
|                                                             | 
|Item 1. Legal Proceedings                                    |  | 17
|Item 2. Unregistered Sales of Securities and Use of Proceeds |  | 17
|Item 3. Defaults Upon Senior Securities                      |  | 17
|Item 4. Submission of Matters to a Vote of Security Holders  |  | 18
|Item 5. Other Information                                    |  | 18
|Item 6. Exhibits                                             |  | 18



---

##### Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

CHINA EVERGREEN ENVIRONMENTAL CORPORATION

Unaudited Consolidated Balance Sheets



|                                                                                                                                                   |  |                |   |  |                  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | - |  | -----------------
|                                                                                                                                                   |  | March 31, 2006 |   |  | December 31, 2005
|                                                                                                                                                   |  | US$(Unaudited) |   |  | US$(Audited)     
|ASSETS                                                                                                                                             |  |                |   |  |                  
|                                                                                                                                                   |  |               
|Current assets                                                                                                                                     |  |                |   |  |                  
|Cash and cash equivalents                                                                                                                          |  | 190,623        |   |  | 175,224          
|Inventories, net                                                                                                                                   |  | 854            |   |  |                 
|Accounts receivable                                                                                                                                |  | 5,472,071      |   |  | 5,220,940        
|Prepayment, deposits and other receivables                                                                                                         |  | 6,157,672      |   |  | 5,942,751        
|Amounts due from related companies                                                                                                                 |  | 1,036,177      |   |  | 887,277          
|Amounts due from directors                                                                                                                         |  |               |   |  |                 
|Amount due from an associate                                                                                                                       |  | 1,785,326      |   |  | 1,772,052        
|Deferred tax assets                                                                                                                                |  | 188,670        |   |  | 187,267          
|                                                                                                                                                   |  |                |   |  |                  
|Total current assets                                                                                                                               |  | 14,831,393     |   |  | 14,185,511       
|                                                                                                                                                   |  |               
|Infrastructure assets, net                                                                                                                         |  | 7,922,265      |   |  | 7,773,485        
|Property, plant and equipment, net                                                                                                                 |  | 339,075        |   |  | 343,709          
|Deposits paid for acquisition of property, plant and equipment                                                                                     |  | 640,260        |   |  | 635,500          
|Deposit paid for acquisition of a subsidiary                                                                                                       |  | 2,062,864      |   |  | 2,047,527        
|Interests in an associate                                                                                                                          |  | 879,736        |   |  | 815,613          
|                                                                                                                                                   |  |                |   |  |                  
|Total assets                                                                                                                                       |  | 26,675,593     |   |  | 25,801,345       
|                                                                                                                                                   |  |                |   |  |                  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                               |  |                |   |  |                  
|                                                                                                                                                   |  |               
|Current liabilities                                                                                                                                |  |                |   |  |                  
|Financial instruments                                                                                                                              |  | 10,168,760     |   |  | 5,699,400        
|Unsecured loan                                                                                                                                     |  | 49,938         |   |  | 86,741           
|Other borrowing                                                                                                                                    |  | 24,969         |   |  | 24,783           
|Accounts payable                                                                                                                                   |  | 7,139,332      |   |  | 6,804,711        
|Accruals and other liabilities                                                                                                                     |  | 1,556,342      |   |  | 1,398,054        
|Amounts due to directors                                                                                                                           |  | 721,966        |   |  | 716,598          
|Amounts due to related companies                                                                                                                   |  | 232,565        |   |  | 230,836          
|Income tax payable                                                                                                                                 |  | 1,802,121      |   |  | 1,557,167        
|                                                                                                                                                   |  |                |   |  |                  
|Total current liabilities                                                                                                                          |  | 21,695,993     |   |  | 16,518,290       
|                                                                                                                                                   |  |                |   |  |                  
|Minority interests                                                                                                                                 |  | 863,872        |   |  | 821,704          
|                                                                                                                                                   |  |                |   |  |                  
|Stockholders equity                                                                                                                               |  |                |   |  |                  
|Common stock, US$0.001 par value, 200,000,000 shares authorized; 135,903,698 shares issued and outstanding at March 31, 2006 and
December 31, 2005 |  | 103,704        |   |  | 103,704          
|Additional paid-in capital                                                                                                                         |  | 5,382,373      |   |  | 5,382,373        
|(Accumulated losses)/retained earnings                                                                                                             |  | (1,638,434     | ) |  | 2,754,118        
|Accumulated other comprehensive income                                                                                                             |  | 268,085        |   |  | 221,156          
|                                                                                                                                                   |  |                |   |  |                  
|Total stockholders equity                                                                                                                         |  | 4,115,728      |   |  | 8,461,351        
|                                                                                                                                                   |  |                |   |  |                  
|Total liabilities and stockholders equity                                                                                                         |  | 26,675,593     |   |  | 25,801,345       
|                                                                                                                                                   |  |                |   |  |                  



1



---

##### Table of Contents

CHINA EVERGREEN ENVIRONMENTAL CORPORATION

Unaudited Consolidated Statements of Operations



|                                                                                                        |  |                              |   |  |            |  
|------------------------------------------------------------------------------------------------------- |  | ---------------------------- | - |  | ---------- | -
|                                                                                                        |  | Three months ended March 31, |  
|                                                                                                        |  | 2006                         |   |  | 2005       |  
|                                                                                                        |  | US$                          |   |  | US$        |  
|Revenue from turn-key engineering projects                                                              |  | 814,746                      |   |  | 1,811,594  |  
|Revenue from BOT waste water treatment services                                                         |  | 239,342                      |   |  | 68,478     |  
|                                                                                                        |  |                              |   |  |            |  
|Total revenue                                                                                           |  | 1,054,088                    |   |  | 1,880,072  |  
|                                                                                                        |  |                             
|Cost of revenue for turn-key engineering projects                                                       |  | (395,277                     | ) |  | (1,199,766 | )
|Cost of revenue for BOT waste water treatment services                                                  |  | (125,432                     | ) |  | (43,690    | )
|                                                                                                        |  |                              |   |  |            |  
|Total cost of revenue exclusive of depreciation and amortization and sales taxes shown separately below |  | (520,709                     | ) |  | (1,243,456 | )
|                                                                                                        |  |                             
|Depreciation and amortization                                                                           |  | (10,352                      | ) |  | (24,312    | )
|Sales taxes                                                                                             |  | (50,273                      | ) |  | (59,783    | )
|                                                                                                        |  |                              |   |  |            |  
|Gross profit                                                                                            |  | 472,754                      |   |  | 552,521    |  
|                                                                                                        |  |                             
|General and administrative expenses                                                                     |  | (113,574                     | ) |  | (61,034    | )
|                                                                                                        |  |                              |   |  |            |  
|Income from operations                                                                                  |  | 359,180                      |   |  | 491,487    |  
|                                                                                                        |  |                             
|Other income                                                                                            |  | 42,609                       |   |  | 2,724      |  
|                                                                                                        |  |                             
|Interest expense                                                                                        |  | (231                         | ) |  | (4,415     | )
|                                                                                                        |  |                             
|Penalty for late filing of registration statement                                                       |  | (246,269                     | ) |  |           |  
|                                                                                                        |  |                             
|Unrealized loss on financial instruments                                                                |  | (4,452,683                   | ) |  |           |  
|                                                                                                        |  |                             
|Share of results in an associate  XL                                                                   |  | 57,797                       |   |  | 35,788     |  
|                                                                                                        |  |                              |   |  |            |  
|(Loss)/income before income tax and minority interest                                                   |  | (4,239,597                   | ) |  | 525,584    |  
|                                                                                                        |  |                             
|Income tax expense                                                                                      |  | (117,076                     | ) |  | (52,389    | )
|                                                                                                        |  |                              |   |  |            |  
|(Loss)/income before minority interest                                                                  |  | (4,356,673                   | ) |  | 473,195    |  
|                                                                                                        |  |                             
|Minority interests                                                                                      |  | (35,879                      | ) |  | (45,188    | )
|                                                                                                        |  |                              |   |  |            |  
|Net (loss)/income                                                                                       |  | (4,392,552                   | ) |  | 428,007    |  
|                                                                                                        |  |                              |   |  |            |  
|Basic net (loss)/income per share                                                                       |  | (0.03                        | ) |  | 0.00       |  
|                                                                                                        |  |                              |   |  |            |  
|Diluted net (loss)/ income per share                                                                    |  | N/A                          |   |  | 0.00       |  
|                                                                                                        |  |                              |   |  |            |  



2



---

##### Table of Contents

CHINA EVERGREEN ENVIRONMENTAL CORP.

Consolidated Statements of Stockholders Equity



|                                                                              |  |               |   |  |                          |   |  |                                       |   |  |                                     |   |                          |         |  |            |  
|----------------------------------------------------------------------------- |  | ------------- | - |  | ------------------------ | - |  | ------------------------------------- | - |  | ----------------------------------- | - | ------------------------ | ------- |  | ---------- | -
|                                                                              |  | Common stock  |   |  | Additionalpaid-incapital |   |  | Retainedearnings/(accumulateddeficit) |   |  | Accumulatedothercomprehensiveincome |   | Totalstockholdersequity |        
|                                                                              |  | No. of shares |   |  | Amount                   |   |  |                                       |   | 
|                                                                              |  |               |   |  | US$                      |   |  | US$                                   |   |  | US$                                 |   |                          | US$     |  | US$        |  
|At January 1, 2004                                                            |  | 29,059,007    |   |  | 29,059                   |   |  | 3,763,332                             |   |  | (182,327                            | ) |                          |        |  | 3,610,064  |  
|                                                                              |  |               |   |  |                          |  
|Issue of shares (Note 21)                                                     |  | 1,200,000     |   |  | 1,200                    |   |  | 118,800                               |   |  |                                    |   |                          |        |  | 120,000    |  
|                                                                              |  |               |   |  |                          |  
|Cancellation of shares before reverse acquisition (Notes 2(ii) and 21)        |  | (13,759,010   | ) |  | (13,759                  | ) |  | 13,759                                |   |  |                                    |   |                          |        |  |           |  
|                                                                              |  |               |   |  |                          |  
|Elimination of capital upon the acquisition of XXM, XY, HY and BJHTSY by EGAG |  |              |   |  |                         |   |  | (4,129,783                            | ) |  |                                    |   |                          |        |  | (4,129,783 | )
|                                                                              |  |               |   |  |                          |  
|Initial capital injection of BJHTSY                                           |  |              |   |  |                         |   |  | 217,392                               |   |  |                                    |   |                          |        |  | 217,392    |  
|                                                                              |  |               |   |  |                          |  
|Initial capital injection of EGAG (Note 2(ii))                                |  |              |   |  |                         |   |  | 300                                   |   |  |                                    |   |                          |        |  | 300        |  
|                                                                              |  |               |   |  |                          |  
|Additional paid-in capital of EGAG (Note 22)                                  |  |              |   |  |                         |   |  | 3,857,296                             |   |  |                                    |   |                          |        |  | 3,857,296  |  
|                                                                              |  |               |   |  |                          |  
|Acquisition of EGAG (Notes 2(ii) and 21)                                      |  | 83,500,000    |   |  | 83,500                   |   |  |                                      |   |  |                                    |   |                          |        |  | 83,500     |  
|                                                                              |  |               |   |  |                          |  
|Net income                                                                    |  |              |   |  |                         |   |  |                                      |   |  | 3,696,949                           |   |                          |        |  | 3,696,949  |  
|                                                                              |  |               |   |  |                          |   |  |                                       |   |  |                                     |   |                          |         |  |            |  
|At December 31, 2004                                                          |  | 99,999,997    |   |  | 100,000                  |   |  | 3,841,096                             |   |  | 3,514,622                           |   |                          |        |  | 7,455,718  |  
|                                                                              |  |               |   |  |                          |   |  |                                       |   |  |                                     |   |                          |         |  |            |  
|At January 1, 2005                                                            |  | 99,999,997    |   |  | 100,000                  |   |  | 3,841,096                             |   |  | 3,514,622                           |   |                          |        |  | 7,455,718  |  
|                                                                              |  |               |   |  |                          |  
|Net income                                                                    |  |              |   |  |                         |   |  |                                      |   |  | 428,007                             |   |                          |        |  | 428,007    |  
|                                                                              |  |               |   |  |                          |   |  |                                       |   |  |                                     |   |                          |         |  |            |  
|At March 31, 2005                                                             |  | 99,999,997    |   |  | 100,000                  |   |  | 3,841,096                             |   |  | 3,942,629                           |   |                          |        |  | 7,883,725  |  
|                                                                              |  |               |   |  |                          |   |  |                                       |   |  |                                     |   |                          |         |  |            |  
|At April 1, 2005                                                              |  | 99,999,997    |   |  | 100,000                  |   |  | 3,841,096                             |   |  | 3,942,629                           |   |                          |        |  | 7,883,725  |  
|                                                                              |  |               |   |  |                          |  
|Issue of shares in September (Notes 18 and 21)                                |  | 32,200,000    |   |  | 32,200                   |   |  |                                      |   |  |                                    |   |                          |        |  | 32,200     |  
|                                                                              |  |               |   |  |                          |  
|Share issued in October for conversion of convertible debenture               |  | 3,703,701     |   |  | 3,704                    |   |  | 996,296                               |   |  |                                    |   |                          |        |  | 1,000,000  |  
|                                                                              |  |               |   |  |                          |  
|Warrants issued with convertible debenture reclassified as equity             |  |              |   |  |                         |   |  | 544,981                               |   |  |                                    |   |                          |        |  | 544,981    |  
|                                                                              |  |               |   |  |                          |  
|Shares issued accounted for as liability (Notes 18 and 21)                    |  |              |   |  | (32,200                  | ) |  |                                      |   |  |                                    |   |                          |        |  | (32,200    | )
|                                                                              |  |               |   |  |                          |  
|Foreign currency translation adjustments                                      |  |              |   |  |                         |   |  |                                      |   |  |                                    |   |                          | 221,156 |  | 221,156    |  
|                                                                              |  |               |   |  |                          |  
|Net loss                                                                      |  |              |   |  |                         |   |  |                                      |   |  | (1,188,511                          | ) |                          |        |  | (1,188,511 | )
|                                                                              |  |               |   |  |                          |   |  |                                       |   |  |                                     |   |                          |         |  |            |  
|At December 31, 2005                                                          |  | 135,903,698   |   |  | 103,704                  |   |  | 5,382,373                             |   |  | 2,754,118                           |   |                          | 221,156 |  | 8,461,351  |  
|                                                                              |  |               |   |  |                          |   |  |                                       |   |  |                                     |   |                          |         |  |            |  
|Foreign currency translation adjustments                                      |  |              |   |  |                         |   |  |                                      |   |  |                                    |   |                          | 46,929  |  | 46,929     |  
|                                                                              |  |               |   |  |                          |  
|Net loss                                                                      |  |              |   |  |                         |   |  |                                      |   |  | (4,392,552                          | ) |                          |        |  | (4,392,552 | )
|                                                                              |  |               |   |  |                          |   |  |                                       |   |  |                                     |   |                          |         |  |            |  
|At March 31, 2006                                                             |  | 135,903,698   |   |  | 103,704                  |   |  | 5,382,373                             |   |  | (1,638,434                          | ) |                          | 268,085 |  | 4,115,728  |  
|                                                                              |  |               |   |  |                          |   |  |                                       |   |  |                                     |   |                          |         |  |            |  



3



---

##### Table of Contents

CHINA EVERGREEN ENVIRONMENTAL CORPORATION

Unaudited Consolidated Statements of Cash Flow



|                                                                                          |  |                              |   |  |            |  
|----------------------------------------------------------------------------------------- |  | ---------------------------- | - |  | ---------- | -
|                                                                                          |  | Three months ended March 31, |  
|                                                                                          |  | 2006                         |   |  | 2005       |  
|                                                                                          |  | US$                          |   |  | US$        |  
|Cash flows from operating activities:                                                     |  |                              |   |  |            |  
|                                                                                          |  |                             
|Net loss                                                                                  |  | (4,392,552                   | ) |  | 428,007    |  
|                                                                                          |  |                             
|Adjustments to reconcile net (loss)/ income to net cash provided by operating activities: |  |                              |   |  |            |  
|Depreciation and amortization                                                             |  | 10,352                       |   |  | 24,312     |  
|Unrealized gain on financial instruments                                                  |  | 4,452,683                    |   |  |           |  
|Decrease in deferred tax assets                                                           |  |                             |   |  | 9,092      |  
|Increase in minority interests                                                            |  | 35,879                       |   |  | 141,806    |  
|Share of results in an associate                                                          |  | (57,797                      | ) |  | (35,788    | )
|                                                                                          |  |                             
|Changes in operating assets and liabilities:                                              |  |                              |   |  |            |  
|(Increase)/decrease in accounts receivable                                                |  | (211,232                     | ) |  | 45,652     |  
|Increase in inventories                                                                   |  | (854                         | ) |  |           |  
|Increase in prepayment, deposits and other receivables                                    |  | (169,771                     | ) |  | (1,864,159 | )
|Increase in accounts payable                                                              |  | 282,591                      |   |  | 988,497    |  
|Increase in accrued liabilities                                                           |  |                             |   |  | 723,186    |  
|Decrease in amounts due to directors                                                      |  |                             |   |  | (91,640    | )
|(Increase)/decrease in amounts due from related companies                                 |  | (141,722                     | ) |  | 876,607    |  
|Increase in accruals and other liabilities                                                |  | 147,264                      |   |  |           |  
|Increase in tax payable                                                                   |  | 232,419                      |   |  | 240,561    |  
|                                                                                          |  |                             
|Net cash provided by operating activities                                                 |  | 187,260                      |   |  | 1,486,133  |  
|                                                                                          |  |                             
|Cash flows from investing activities:                                                     |  |                              |   |  |            |  
|Acquisition of infrastructure assets                                                      |  | (59,407                      | ) |  | (1,742,064 | )
|Increase in amount due from an associate                                                  |  |                             |   |  | (4,564     | )
|                                                                                          |  |                             
|Net cash used in investing activities                                                     |  | (59,407                      | ) |  | (1,746,628 | )
|                                                                                          |  |                             
|Cash flows from financing activities:                                                     |  |                              |   |  |            |  
|Repayment of borrowing                                                                    |  | (37,313                      | ) |  | (48,310    | )
|                                                                                          |  |                             
|Net cash used in financing activities                                                     |  | (37,313                      | ) |  | (48,310    | )
|                                                                                          |  |                             
|Effect of foreign currency translation on cash and cash equivalents                       |  | (75,141                      | ) |  |            |  
|                                                                                          |  |                             
|Net increase/(decrease) in cash and cash equivalents                                      |  | 15,399                       |   |  | (308,805   | )
|                                                                                          |  |                             
|Cash and cash equivalents, beginning of period                                            |  | 175,224                      |   |  | 336,079    |  
|                                                                                          |  |                             
|Cash and cash equivalents, end of period                                                  |  | 190,623                      |   |  | 27,274     |  



4



---

##### Table of Contents

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The condensed consolidated financial statements of China Evergreen Environmental Corporation (the Company) and subsidiaries (the Group) included
herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in consolidated financial
statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be read in conjunction with the annual audited financial statements and the notes thereto included in the Companys Form 10-KSB Annual Report, and other reports filed with
the SEC.

The accompanying unaudited quarterly consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the
opinion of management, necessary to present fairly the financial position, results of operations and cash flows of the Group for the periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of,
results of any other quarterly period of or for the fiscal year taken as a whole. Factors that affect the comparability of financial data from year to year and for comparable quarterly periods include non-recurring expenses associated with the
Groups costs incurred to reorganize the Group, raise capital, and stock options and awards. Certain financial information that is not required for interim financial reporting purposes has been omitted.

NOTE 2 - DESCRIPTION OF BUSINESS

Our company was organized as a
Nevada corporation on September 10, 1996 under the name Discovery Investments, Inc., and was previously engaged in the business of seeking, investigating and, if such investigation warranted, acquiring an interest in a business opportunity.

On October 15, 2004, we were the subject of a reverse acquisition by Evergreen Asset Group Limited, an International Business Company organized under
the laws of the British Virgin Islands (Evergreen), pursuant to which we have acquired 100% of the outstanding shares of Evergreen capital stock in exchange for a controlling interest in our common stock. Pursuant to a securities
purchase agreement dated September 9, 2004, as amended, we issued 83,500,000 shares of our common stock (representing 83.5% of our outstanding capital stock) in exchange for all of the issued and outstanding shares of Evergreen capital stock
transferred to us by the Evergreen shareholders at the closing. Following the close of the reverse acquisition, we changed our corporate name from Discovery Investments, Inc. to China Evergreen Environmental Corporation (CEEC,
we, us or the Company).



5



---

##### Table of Contents

As a result of the transactions described above, Evergreen became our wholly owned subsidiary. Evergreen, through its
three majority owned subsidiaries, Guang Dong Xin Xing Mei Biology Company Limited (XXM), Bei Jing Hao Tai Shi Yuan Water Purifying Company Limited (BJHT) and Hai Yang City Sheng Shi Environment Protection Company Limited
(HY), provides waste water turn-key engineering, equipment and chemical trading. Evergreen currently holds 90% of XXM. XXM provides turn-key waste water treatment engineering design and contracting. XXM also holds 90% and 35%
respectively in the equity interest of the following two water treatment facilities operated through build, operate and transfer (BOT) arrangements with the PRC government: (i) Tian Jin Shi Sheng Water Treatment Company Limited
(TJSH), which commissioned water treatment in November 2003 and has a daily treatment capacity of approximately 10,000 cubic meter and; (ii) Xin Le Sheng Mei Water Purifying Company Limited (XL), which also commissioned
water treatment in November 2003 and has a daily treatment capacity of 40,000 cubic meter. XXM is retained as the managers to manage both TJSH and XL. The fees from XL and TJSH did not represent a material portion of our revenue during the first
quarter of 2006.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

IMPAIRMENT OF ASSETS: The Groups policy is to periodically review and evaluate whether there has been a permanent impairment in the value of long-lived assets. Factors considered in the evaluation include
current operating results, trends and anticipated undiscounted future cash flows. An impairment loss is recognized to the extent that the sum of undiscounted estimated future cash flows that is expected to result from the use of the asset, or other
measure of fair value, is less than the carrying value.

OTHER INVESTMENT: Other investment includes equity investment in a private company and is carried
at fair value. Unless there has been a permanent impairment to the value of the investment, the change in fair value is reported as a separate component of other comprehensive income or loss. Permanent impairment to the value of the investment is
recognized in the consolidated statements of operations.

REVENUE RECOGNITION: The Group recognizes revenue using various revenue recognition policies
based on the nature of the sale and the terms of the contract.

Revenues from fixed price long-term contracts are recognized on the percentage of
completion method for individual contracts. We follow the guidance of American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type
Contracts, for our accounting policy relating to the use of the percentage-of-completion method, estimated costs and claim recognition for construction contracts. Revenues are recognized in the ratio that costs incurred bear to total estimated
contract costs to the extent we believe related collection is probable. The use of the percentage of completion method of revenue recognition requires estimates of percentage of project completion. Changes in job performance, estimated profitability
and final contract settlements may result in revisions to costs and income in the period in which the revisions are determined. Provisions for any estimated losses on uncompleted contracts are made in the period in which such losses are
determinable. In instances when the work performed on fixed price agreements is of relatively short duration, we use the completed contract method of accounting whereby revenue is recognized when the work is completed. 5% to 10% of the total
contract value will be treated as retention monies withheld to ensure performance of contract during the warranty period of up to 12 months as stipulated in the fixed price contracts, both long term and short term.



6



---

##### Table of Contents

Revenues arising from waste water treatment are recognized based on waste water treated as recorded daily by meters read
at rates, in RMB/ton, as prescribed under the BOT agreements in accordance with SEC Staff Accounting Bulletin, (SAB) Topic 13 Revenue Recognition. We meet the following four criteria for revenue recognition outlined in SAB
Topic 13:



| | 1. | There is sufficient evidence to support that sales arrangements exist;
| | -- | ----------------------------------------------------------------------



| | 2. | The price to the buyer is fixed through signed contracts;
| | -- | ---------------------------------------------------------



| | 3. | Meter readings illustrate that delivery of treated waste water has occurred; and
| | -- | --------------------------------------------------------------------------------



| | 4. | Collectibility is reasonably assured through one or more of the following: due diligence prior to contract signing; historical payment practices; or required upfront payments.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

INCOME PER SHARE: Basic income per share is computed by dividing the net income for the year by the weighted average number of common shares
outstanding during the year. Diluted income per share is computed by dividing the net income for the year by the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares, composed of
incremental common shares issuable upon the exercise of stock options, unvested restricted common stock and contingently issuable shares that are probable of being issued, are included in diluted income per share to the extent such shares are
dilutive. In accordance with SFAS 128, Earnings Per Share, the Company uses income from continuing operations, net of income taxes as the control number in determining whether common equivalent shares are dilutive or
anti-dilutive in periods where discontinued operations are reported.

NOTE 4 - REVENUE

The Company reported total revenue of $1,054,088 for the three-month period ended March 31, 2006 as compared to $1,880,072 for the three-month period ended March 31, 2005. The total revenue for the
three-month period ended March 31, 2006 is comprised of revenue from turn-key engineering projects of $814,746 and revenue from BOT waste water treatment services of $239,342 while the total revenue for the three-month period ended
March 31, 2005 is comprised of revenue from turn-key engineering projects of $1,811,594 and revenue from BOT waste water treatment services of $68,478. The higher revenue from turn-key engineering projects for the three-month period ended
March 31, 2005 is mainly due to the completion of turn-key engineering project in Le Chang City (approximately $1.8 million). Revenue from turn-key engineering projects for the three-month period ended March 31, 2006 includes revenue
recognized for China Environment Industrial Park Wastewater Treatment Plant and Yongji Development Zone Wastewater Treatment Plant (Phase 2). Revenue from BOT waste water treatment services is higher for the three-month period ended March 31,
2006 because of the inclusion of revenue from the HY BOT project in addition to the revenue from TJ BOT project.



7



---

##### Table of Contents

NOTE 5 - NET (LOSS)/ INCOME PER SHARE



| | (i) | The basic net (loss)/income per share is calculated using the net income and the weighted average number of shares outstanding during the year.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------



|                                                     |  |                                   |   |  |           
|---------------------------------------------------- |  | --------------------------------- | - |  | ----------
|                                                     |  | Three-month period endedMarch 31,
|                                                     |  | 2006                              |   |  | 2005      
|Net (loss)/income (US$)                              |  | (4,392,552                        | ) |  | 428,007   
|                                                     |  |                                   |   |  |           
|Weighted average number of common shares outstanding |  | 135,903,698                       |   |  | 99,999,997
|                                                     |  |                                   |   |  |           
|Basic net (loss)/income per share (US$)              |  | (0.03                             | ) |  | 0.00      
|                                                     |  |                                   |   |  |           



| | (ii) | The diluted net (loss)/income per share is calculated using the net income and the weighted average number of shares outstanding during the year together with shares issuable upon
exercise of all warrants issued.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                             |  |                                   |   |  |           
|------------------------------------------------------------ |  | --------------------------------- | - |  | ----------
|                                                             |  | Three-month period endedMarch 31,
|                                                             |  | 2006                              |   |  | 2005      
|Net (loss)/income (US$)                                      |  | (4,392,552                        | ) |  | 428,007   
|                                                             |  |                                   |   |  |           
|Diluted weighted average number of common shares outstanding |  | N/A                               |   |  | 99,999,997
|                                                             |  |                                   |   |  |           
|Diluted net (loss)/income per share (US$)                    |  | N/A                               |   |  | 0.00      
|                                                             |  |                                   |   |  |           

The diluted net (loss)/income per share for the three-month period ended March 31, 2006 was
not shown as the ordinary shares issuable under outstanding warrants were anti-dilutive.

NOTE 6  FINANCIAL INSTRUMENTS

The fair values of the financial instruments as of March 31, 2006 are as below:



|                                 |  |           
|-------------------------------- |  | ----------
|September Warrants at fair value |  | 10,136,560
|Share capital at par value       |  | 32,200    
|                                 |  |           
|                                 |  | 10,168,760
|                                 |  |           



8



---

##### Table of Contents

On September 14, 2005, the Company closed the private placement sale to accredited investors of units consisting of
shares of our common stock and warrants to purchase shares of our common stock for aggregate gross proceeds of $4.83 million (September Private Placement). Pursuant to the subscription agreements entered into with the investors, we
issued to the investors 161 units at a price of $30,000 per unit. Each unit consisted of 200,000 shares of our common stock, priced at $0.15 per share, and warrants to purchase 200,000 shares of our common stock over a five year period at an
exercise price of $0.20 per share. Pursuant to the terms of the subscription agreements, we granted the investors limited registration rights for all common shares comprising the units, including the common shares issuable on exercise of the
warrants. The Company also issued to Westminster Securities Corporation, as partial compensation for their placement agent services, 7,728,000 placement agent warrants to purchase one share each of our common shares, a portion of which has been
assigned by Westminster Securities Corporation to certain of its officers and employees (the warrants issued in the September Private Placement together with the placement agent warrants are hereinafter referred to as September
Warrants).

The Company used the Black-Scholes model in calculating the fair market value of the September Warrants and allocated $4,797,800 of the
$4,830,000 proceeds to the September Warrants. The difference between the fair value of the September Warrants and the allocated amount is recorded as non-cash financing charges and expensed of at the date of issuance. The principal assumptions used
in the computation of the September Warrants are: expected term of 5 years; a risk-free rate of return of 4.24%; dividend yield of zero percent; and a volatility of 70%.

The Company granted to the holders of the April Warrants certain piggy-back and demand registration rights. Pursuant to the agreements surrounding the September Private Placement, in the event that the Company
determined to undertake a registration of securities, the Company would include, at the request of the holder of Registrable Securities, the Registrable Securities in the registration statement. If the Company did not file a registration
statement by the 120th day from the closing of such financing, and the Company shall have received a written request signed by the holders holding the majority of the Registrable Securities, then the Company was obligated to file, at its expense, a
registration statement covering the Registrable Securities. Once such registration statement has been filed and declared effective, the Company is obligated to keep such registration statement effective until the earlier of (i) the date that
all of the Registrable Securities have been sold pursuant to such registration statement, (ii) all Registrable Securities have been otherwise transferred to persons who may trade such shares without restriction under the Securities Act, and the
Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend, or (iii) all Registrable Securities may be sold at any time, without volume or manner of sale limitations pursuant to
Rule 144(k) or any similar provision then in effect under the Securities Act. As of September 30, 2005, the Company has not received any written request signed by the holders holding the majority of the Registrable Securities.

The September Warrants were issued pursuant to the agreements surrounding the September Private Placement. The subscription agreement contains a liquidated damages
clause which requires cash penalties equal to two percent (2.0%) of the purchase price of the registrable securities purchased from the Company and held by the investors each month (or portion thereof) if the Companys registration of
stock does not become effective within the earlier of sixty (60) days from the first filing date of the Registration Statement or three (3) business days of clearance by the Commission to request effectiveness.



9



---

##### Table of Contents

As the convertible debentures are convertible into a variable number of shares, the requirements for sufficient
authorized and unissued shares under paragraphs 19 to 24 of EITF 00-19 Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Companys Own Stock have not been met with respect to the September
Warrants. Accordingly, the September Warrants have been recorded as a liability on the balance sheet. The changes in fair market value (subsequent to the initial recording of the liability based on the allocation of proceeds) have been recorded as
adjustments in the line Unrealized profit/(loss) on financial instrument in the Statement of Operations. In addition, as the registration right agreement is combined with the subscription agreement, they should be considered together as
a unit and accounted for as a derivative under FAS 133. Upon the requirements for sufficient authorized and unissued shares are met and the effectiveness of the registration statement, the September Warrants will be recorded as equity.

Since the liquidated damages are payable in cash, under paragraphs 12-32 of EITF 00-19 Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in a Companys Own Stock, contracts that include any provision that could require net-cash settlement cannot be accounted for as equity. In addition, the convertible debentures are convertible into a variable number of
shares, the requirements for sufficient authorized and unissued shares under paragraphs 19 to 24 of EITF 00-19 are not met. Accordingly, the proceeds of the private placement in September allocated for par value of the common stock have been
recorded as a liability on the balance sheet. Upon the requirements for sufficient authorized and unissued shares are met and the effectiveness of the registration statement, the amount will be recorded as equity.



10



---

##### Table of Contents

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

FORWARD-LOOKING INFORMATION

Much of the discussion in this Item is forward looking as that term is used in Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934. Actual operations and results may materially differ from present plans and projections due to changes in economic conditions, new business opportunities, changed business conditions, and other developments. Other factors that
could cause results to differ materially are described in our filings with the Securities and Exchange Commission.

The following are factors that could
cause actual results or events to differ materially from those anticipated, and include, but are not limited to general economic, financial and business conditions, changes in and compliance with governmental laws and regulations, including various
state and federal environmental regulations, our ability to obtain additional financing from outside investors and/or bank and mezzanine lenders; and our ability to generate sufficient revenues to cover operating losses and position us to achieve
positive cash flow.

Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date
hereof. We believe the information contained in this Form 10-QSB to be accurate as of the date hereof. Changes may occur after that date. We will not update that information except as required by law in the normal course of our public disclosure
practices.

Additionally, the following discussion regarding our financial condition and results of operations should be read in conjunction with the
financial statements and related notes contained in Item 1 of Part I of this Form 10-QSB.

RESULTS OF OPERATIONS

The following table sets forth the items in our consolidated statements of operations for the periods indicated.



11



---

##### Table of Contents

|                                                                                                        |  |                              |   |  |            |  
|------------------------------------------------------------------------------------------------------- |  | ---------------------------- | - |  | ---------- | -
|                                                                                                        |  | Three months ended March 31, |  
|                                                                                                        |  | 2006                         |   |  | 2005       |  
|                                                                                                        |  | US$                          |   |  | US$        |  
|Revenue from turn-key engineering projects                                                              |  | 814,746                      |   |  | 1,811,594  |  
|Revenue from BOT waste water treatment services                                                         |  | 239,342                      |   |  | 68,478     |  
|                                                                                                        |  |                              |   |  |            |  
|Total revenue                                                                                           |  | 1,054,088                    |   |  | 1,880,072  |  
|                                                                                                        |  |                             
|Cost of revenue for turn-key engineering projects                                                       |  | (395,277                     | ) |  | (1,199,766 | )
|Cost of revenue for BOT waste water treatment services                                                  |  | (125,432                     | ) |  | (43,690    | )
|                                                                                                        |  |                              |   |  |            |  
|Total cost of revenue exclusive of depreciation and amortization and sales taxes shown separately below |  | (520,709                     | ) |  | (1,243,456 | )
|                                                                                                        |  |                             
|Depreciation and amortization                                                                           |  | (10,352                      | ) |  | (24,312    | )
|Sales taxes                                                                                             |  | (50,273                      | ) |  | (59,783    | )
|                                                                                                        |  |                              |   |  |            |  
|Gross profit                                                                                            |  | 472,754                      |   |  | 552,521    |  
|                                                                                                        |  |                             
|General and administrative expenses                                                                     |  | (113,574                     | ) |  | (61,034    | )
|                                                                                                        |  |                              |   |  |            |  
|Income from operations                                                                                  |  | 359,180                      |   |  | 491,487    |  
|                                                                                                        |  |                             
|Other income                                                                                            |  | 42,609                       |   |  | 2,724      |  
|                                                                                                        |  |                             
|Interest expense                                                                                        |  | (231                         | ) |  | (4,415     | )
|                                                                                                        |  |                             
|Penalty for late filing of registration statement                                                       |  | (246,269                     | ) |  |           |  
|                                                                                                        |  |                             
|Unrealized loss on financial instruments                                                                |  | (4,452,683                   | ) |  |           |  
|                                                                                                        |  |                             
|Share of results in an associate  XL                                                                   |  | 57,797                       |   |  | 35,788     |  
|                                                                                                        |  |                              |   |  |            |  
|(Loss)/income before income tax and minority interest                                                   |  | (4,239,597                   | ) |  | 525,584    |  
|                                                                                                        |  |                             
|Income tax expense                                                                                      |  | (117,076                     | ) |  | (52,389    | )
|                                                                                                        |  |                              |   |  |            |  
|(Loss)/income before minority interest                                                                  |  | (4,356,673                   | ) |  | 473,195    |  
|                                                                                                        |  |                             
|Minority interests                                                                                      |  | (35,879                      | ) |  | (45,188    | )
|                                                                                                        |  |                              |   |  |            |  
|Net (loss)/income                                                                                       |  | (4,392,552                   | ) |  | 428,007    |  
|                                                                                                        |  |                              |   |  |            |  

Total revenue. The Company reported total revenue of $1,054,088 for the three-month period ended
March 31, 2006 as compared to $1,880,072 for the three-month period ended March 31, 2005. The total revenue for the three-month period ended March 31, 2006 is comprised of revenue from turn-key engineering projects of $814,746 and
revenue from BOT waste water treatment services of $239,342 while the total revenue for the three-month period ended March 31, 2005 is comprised of revenue from turn-key engineering projects of $1,811,594 and revenue from BOT waste water
treatment services of $68,478. The higher revenue from turn-key engineering projects for the three-month period ended March 31, 2005 is mainly due to the completion of turn-key engineering project in Le Chang City (approximately $1.8 million).
Revenue from turn-key engineering projects for the three-month period ended March 31, 2006 includes revenue recognized for China Environment Industrial Park Wastewater Treatment Plant and Yongji Development Zone Wastewater Treatment Plant
(Phase 2). Revenue from BOT waste water treatment services is higher for the three-month period ended March 31, 2006 because of the inclusion of revenue from the HY BOT project in addition to the revenue from TJ BOT project.



12



---

##### Table of Contents

Cost of revenue. Our total cost of revenue, exclusive of depreciation and amortization and sales taxes,
decreased from $1,243,456 for the three-month period ended March 31, 2005 to $520,709 for the three-month period ended March 31, 2006. This is in line with the decrease in total revenue for the three-month period ended March 31, 2006
as compared to the total revenue for the three-month period ended March 31, 2005. Cost of revenue for the three-month period ended March 31, 2005 comprised of cost of revenue for turn-key engineering projects of $1,199,766 and cost of
revenue for BOT waste water treatment services of $43,690 whereas cost of revenue for the three-month period ended March 31, 2006 comprised of cost of revenue for turn-key engineering projects of $395,277 and cost of revenue for BOT waste water
treatment services of $125,432.

Gross profit. Gross profit as a percentage of total revenue for the three-month periods ended March 31,
2006 and 2005 were approximately 45% or $472,754 and approximately 29% or $552,521, respectively. Gross margin, exclusive of depreciation and amortization and sales taxes, for turn-key engineering projects for the three-month periods ended
March 31, 2006 and 2005 were approximately 51% or $419,469 and approximately 34% or $611,828 respectively. The slight increase is mainly due to better negotiation skills for better pricing and also better cost control with cumulative
experience. Gross margin, exclusive of depreciation and amortization and sales taxes, for BOT waste water treatment services for the three-month period ended March 31, 2006 and 2005 were approximately 48% or $113,910 and approximately 36% or
$24,788. The higher gross margin, exclusive of depreciation and amortization and sales taxes, for BOT waste water treatment services for the three-month periods ended March 31, 2006 is mainly due to better cost control with cumulative
experience coupled with better efficiency for HY BOT project as a result of the higher capacity.

General and administrative expenses. Our
total general and administrative expenses for the three-month periods ended March 31, 2006 and 2005 were $113,574 and $61,034 respectively. The principal components of general and administrative expenses are administrative salaries and
benefits, depreciation and amortization, traveling expenses, rental and other general administration costs. The increase in general and administrative expenses for the three-month periods ended March 31, 2006 as compared to that for the
three-month periods ended March 31, 2005 is mainly due to the expansion of the company and also expenses incurred in moving to the new office in Panyu, Guangzhou.

Penalty for late filing of registration statement. This represents the penalty accrued for late effectiveness of the registration statement for the private placement sale to accredited investors of units
consisting of shares of our common stock and warrants to purchase shares of our common stock for aggregate gross proceeds of $4.83 million conducted in September 2005. This penalty amounted to $246,269 for the three-month period ended March 31,
2006. The subscription agreement contains a liquidated damages clause which requires cash penalties equal to two percent (2.0%) of the purchase price of the registrable securities purchased from the Company and held by the investors each month
(or portion thereof) if the Companys registration of stock does not become effective within the earlier of sixty (60) days from the first filing date of the registration statement (October 12, 2005) or three (3) business days of
clearance by the Commission to request effectiveness.



13



---

##### Table of Contents

Unrealized loss on financial instruments. Unrealized gains or losses in financial instruments represent the
change in fair market value of the financial instruments at each reporting date. The unrealized loss in financial instruments of approximately $4.45 million for the three-month periods ended March, 2006 comprised of unrealized loss for the changes
in fair values of the September issued warrant and the placement agent warrants. There were no unrealized gains or losses in financial instruments recorded in 2004.

Share of results in an associate XL. This represents the share of net profits in Xin Le Sheng Mei Water Purifying Company Limited in which the Group has 35% equity interest. Share of results in XL
for the three-month periods ended March 31, 2006 and 2005 were $57,797 and $35,788, respectively. The increase in share of net profits was as a result of increase in net profit of XL.

Net (loss) / income. We had a net loss, after income tax and minority interests, of $4,392,552 for the three-month period ended March 31, 2006 and a
net income, after income tax and minority interests, of $428,007 for the three-month period ended March 31, 2005.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are our cash and cash flow we generate from operations and financing activities. Net cash provided by operating
activities during the three-month period ended March 31, 2006 was $187,260 while net cash provided by operating activities during the three-month period ended March 31, 2005 was $1,486,133. Net cash provided by operating activities in the
three-month period ended March 31, 2006 consisted of net loss of $4,392,552, adjustment for non-cash items of $4,441,117 and changes in operating assets and liabilities of $138,695. Cash flow from operating activities consisted of increase in
accounts receivable of $211,232, increase in inventories of $854, increase in prepayment, deposits and other receivables of $169,771, increase in accounts payable of $282,591, increase in amounts due from related companies of $141,722 and increase
in tax payable of $232,419.

In April 2005, we conducted the private placement sale of 20 units, at $25,000 per unit, for the gross proceeds of $500,000.
Each unit consisted of (a) one 12% convertible debenture in the original principal amount of $25,000, convertible into shares of our common stock at the rate of the lesser of (i) $0.20 per share or (ii) a 10% discount to the price per
share of common stock (or conversion price per share of common stock) of the next private placement conducted by us prior to any conversion of the debenture, and (b) 125,000 detachable warrants to purchase one share each of our common stock at
an exercise price of $0.20 per share, expiring ten years from their date of issuance. The debentures are due and payable August 1, 2005. The debenture holders, however, extended the payment period to September 30, 2005. All the debenture
holders have converted the debentures into 3,703,701 shares of our common stock on October 1, 2005.



14



---

##### Table of Contents

On September 14, 2005, we closed the private placement sale to accredited investors of units consisting of shares of
our common stock and warrants to purchase shares of our common stock for aggregate gross proceeds of $4.83 million. Pursuant to the subscription agreements entered into with the investors, we issued to the investors 161 units at a price of $30,000
per unit. Each unit consisted of 200,000 shares of our common stock, priced at $0.15 per share, and warrants to purchase 200,000 shares of our common stock over a five year period at an exercise price of $0.20 per share. Pursuant to the terms of the
subscription agreements, we granted the investors limited registration rights for all common shares comprising the units, including the common shares issuable on exercise of the warrants.

We anticipate raising capital from outside investors coupled with bank or mezzanine lenders to fund the Companys expansion plan. As of the date of this report,
other than as disclosed, we have not entered into any negotiations with any third parties to provide such capital. We anticipate that our current financing strategy of private debt and equity offerings will meet our anticipated objectives and
business operations for the next 12 months. We continue to evaluate opportunities for corporate development. Subject to our ability to obtain adequate financing at the applicable time, we may enter into definitive agreements on one or more of those
opportunities.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by managements application of accounting policies. Critical accounting policies include revenue recognition,
impairment of assets and accounting for allowance of accounts receivable.

Revenue recognition.  The Group recognizes revenue using
various revenue recognition policies based on the nature of the sale and the terms of the contract.

Revenues from fixed price long-term contracts are
recognized on the percentage of completion method for individual contracts. We follow the guidance of American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type
and Certain Production-Type Contracts, for our accounting policy relating to the use of the percentage-of-completion method, estimated costs and claim recognition for construction contracts. Revenues are recognized in the ratio that costs incurred
bear to total estimated contract costs to the extent we believe related collection is probable. The use of the percentage of completion method of revenue recognition requires estimates of percentage of project completion. Changes in job performance,
estimated profitability and final contract settlements may result in revisions to costs and income in the period in which the revisions are determined. Provisions for any estimated losses on uncompleted contracts are made in the period in which such
losses are determinable. In instances when the work performed on fixed price agreements is of relatively short duration, we use the completed contract method of accounting whereby revenue is recognized when the work is completed. 5% to 10% of the
total contract value will be treated as retention monies withheld to ensure performance of contract during the warranty period of up to 12 months as stipulated in the fixed price contracts, both long term and short term.



15



---

##### Table of Contents

Revenues arising from waste water treatment are recognized based on waste water treated as recorded daily by meters read
at rates, in RMB/ton, as prescribed under the BOT agreements in accordance with SEC Staff Accounting Bulletin, (SAB) Topic 13 Revenue Recognition. We meet the following four criteria for revenue recognition outlined in SAB
Topic 13:



| | 1. | There is sufficient evidence to support that sales arrangements exist;
| | -- | ----------------------------------------------------------------------



| | 2. | The price to the buyer is fixed through signed contracts;
| | -- | ---------------------------------------------------------



| | 3. | Meter readings illustrate that delivery of treated waste water has occurred; and
| | -- | --------------------------------------------------------------------------------



| | 4. | Collectibility is reasonably assured through one or more of the following: due diligence prior to contract signing; historical payment practices; or required upfront payments.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenues from trading and consultancy are recognized when goods are delivered or as services are performed. The contractual terms of the
purchase agreements or consultancy agreements dictate the recognition of revenues by us. We recognize revenue in accordance with Staff Accounting Bulletin No. 104. Accordingly, four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based
on managements judgments regarding the fixed nature of the selling prices of the products or services delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and
other adjustments are provided for in the same period the related sales are recorded. We defer any revenue for which the product has not been delivered or is subject to refund until such time that we and our customer jointly determine that the
product has been delivered or no refund will be required.

Impairment of assets. The Groups policy is to periodically review and
evaluate whether there has been a permanent impairment in the value of long-lived assets. Factors considered in the evaluation include current operating results, trends and anticipated undiscounted estimated future cash flows that is expected to
result from the use of the asset, or other measure of fair value, is less than the carrying value.

Allowances for accounts receivable. The
Groups provisioning policy for bad and doubtful debt is based on the evaluation of collectability and aging analysis of accounts receivable and on managements judgment. The Group does no require collateral or other security to support
clients receivables. The Group conducts periodic review of its clients financial condition and customer payment practice to minimize collection risk on accounts receivable. This review is based on a considerable amount of judgment which
is required in assessing the ultimate realization of these receivables, including the current creditworthiness and the past collection history of each customer. During the first quarter of 2006 financial period, the Group had not made any allowance
for doubtful debts.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.



16



---

##### Table of Contents

ITEM 3 CONTROLS AND PROCEDURES

Disclosure controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions
rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and
communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this Quarterly Report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of our disclosure controls and procedures
(as defined in Rules 13a-15(e) of the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective as at the end of the period covered by this
report.

There was no change in our internal controls, which are included within disclosure controls and procedures, during our most recently completed
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls.

PART II - OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

As of the date of this report, we are not involved in any legal
proceedings.

ITEM 2 UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

In April 2005, we conducted the private placement sale of 20
units, at $25,000 per unit, for the gross proceeds of $500,000. Each unit consisted of (a) one 12% convertible debenture in the original principal amount of $25,000, convertible into shares of our common stock at the rate of the lesser of
(i) $0.20 per share or (ii) a 10% discount to the price per share of common stock (or conversion price per share of common stock) of the next private placement conducted by us prior to any conversion of the debenture, and (b) 125,000
detachable warrants to purchase one share each of our common stock at an exercise price of $0.20 per share, expiring ten years from their date of issuance. The debentures are due and payable August 1, 2005. The debenture holders, however,
extended the payment period to September 30, 2005. All the debenture holders have converted the debentures into 3,703,701 shares of our common stock on October 1, 2005.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None.



17



---

##### Table of Contents

On September 14, 2005, we closed the private placement sale to accredited investors of units consisting of shares of
our common stock and warrants to purchase shares of our common stock for aggregate gross proceeds of $4.83 million. Pursuant to the subscription agreements entered into with the investors, we issued to the investors 161 units at a price of $30,000
per unit. Each unit consisted of 200,000 shares of our common stock, priced at $0.15 per share, and warrants to purchase 200,000 shares of our common stock over a five year period at an exercise price of $0.20 per share. Pursuant to the terms of the
subscription agreements, we granted the investors limited registration rights for all common shares comprising the units, including the common shares issuable on exercise of the warrants. Approximately $2.4 million of the proceeds from the September
private placement has been placed in escrow for the acquisition of a waste water plant and $0.6 million has been paid as deposit for the purchase of equipments.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5 OTHER INFORMATION

None.

ITEM 6 EXHIBITS

(a) Exhibits



| |  |              |  |                                                                  
| |  | ------------ |  | -----------------------------------------------------------------
| |  |             
| |  | Exhibit 31.1 |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
| |  |             
| |  | Exhibit 31.2 |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
| |  |             
| |  | Exhibit 32.1 |  | Section 906 Certification                                        



18



---

##### Table of Contents

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                    |  |                                           |  |                        
|------------------- |  | ----------------------------------------- |  | -----------------------
|                    |  | China Evergreen Environmental Corporation
|                    |  | (Registrant)                             
|                    |  |                                          
|Dated: May 15, 2006 |  | By:                                       |  | /s/ Chong Liang Pu     
|                    |  |                                           |  | Chong Liang Pu,        
|                    |  |                                           |  | Chief Executive Officer
|                    |  |                                          
|Dated: May 15, 2006 |  | By:                                       |  | /s/ Peh Chung Lim      
|                    |  |                                           |  | Peh Chung Lim,         
|                    |  |                                           |  | Chief Financial Officer



19